Why a Chinese Ponzi scheme that preyed on poor farmers should scare us much more than Bernie Madoff’s fraud

One evening in December 2008, Bernie Madoff sat his sons right down to tell them he had swindled hundreds of his clients out of billions of dollars. He knew the game was up. He’d already written last cheques to close family and friends for $137 million to state sorry – cheques that were never cashed.

Within hours, the happy couple had informed the FBI, and agents had appeared at the Madoff home in New York’s Upper East Side.

Lots of people had been taken in: from Steven Spielberg to Kevin Bacon, from former Ny governor Eliot Spitzer to City superwoman Nicola Horlick. In total, more than $65 billion is estimated to have been lost within the fraud.

The story dominated the headlines for months until Madoff himself was jailed for 150 years in June 2009. His eldest son Mark committed suicide in the apartment 2 yrs after Bernie was jailed; younger son Andrew died of cancer in 2014, having blamed his father in a magazine interview for “killing me slowly.” His wife Ruth, who had four homes and three boats, was photographed late this past year furnishing a two-bedroom Connecticut apartment with items purchased at Ikea.

Little wonder the Madoff saga has been depicted now on U.S. television inside a two-part miniseries starring actors Richard Dreyfuss and Blythe Danner as Bernie and Ruth. Next year, Robert de Niro and Michelle Pfieffer will require on the same roles in a film form of the saga called The Wizard of Lies.

The lessons of Ezubao are much more important compared to those of the Madoff fraud

But, as the passion for that Ponzi scheme is undiminished almost eight years on, the spotlight on a similar fraud has dimmed after just a couple days.

This is even though the Ezubao scheme, which has been uncovered in China, could have much bigger ramifications than anything Madoff did.

The 34-year-old Ding Ning only founded Ezubao in 2004. But he was quick to manoeuvre his business in to the heart of Chinese society.

Last year, Ezubao, a peer-to-peer lending platform which claimed to match investors with companies searching for finance, sponsored the online broadcasts from the National People’s Congress with a subsidiary of state-owned news agency Xinhua. Using its logo adorning the Great Hall of those in Beijing, how could savers doubt it was a reliable brand? Ding also were able to secure advertising slots on state-owned CCTV. Also, he encouraged employees to create ostentatious displays of opulence. In November, some 800 million RMB ($169 million) was distributed to staff, in part to ensure they wore designer clothes and jewellery to work and made the company look more successful. But Ding’s “perp’” walk on Chinese state television this week – following his arrest along with 20 fellow executives – suggests Ezubao was nothing more than a financial house of cards.

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One of the company’s executives has since been reported as stating that 95 per cent of the projects it claimed to purchase were fake. Reports claim that some 880,000 people have collectively lost $10.7 billion after falling for Ding’s hype.

The lessons of Ezubao are much more important compared to those from the Madoff fraud. This wasn’t wealthy individuals benefiting from the greed of other wealthy individuals; this was a near-state sponsored company capitalizing on Chinese citizens who could least afford to lose their money.

Ezubao’s customers appear to have been from rural areas. More than 1,000 sales agencies were opened across the nation to promote the organization in local communities.

Ezubao could just be the tip of the proverbial iceberg with regards to fraud

It is these investors who began protesting in December following the business’s activities were first suspended – protests which went largely unreported in Western media.

And Ezubao might just be the end of the proverbial iceberg when it comes to fraud among China’s burgeoning wave of monetary technology players. Last March, Dagong, China’s credit score agency, warned that some 1,250 online financial platforms were vulnerable to going bankrupt. Its president, Xu Zhipeng, cautioned that “bad weather of credit risks is brewing in the peer-to-peer lending industry”, which had grown threefold the year before to US$17 billion.

In November, a Chinese financial website reported some 79 online lenders had problematic business activities, up from 32 a month earlier.

That same month, and not before time, the Chinese government acknowledged internet finance for the first time in its 13th five-year plan. This followed attempts by the Peoples Bank of China to start regulating the sector.

Some of those that have studied the rapid go up and down of Ezubao believe its demise may originate from growing discomfort among Chinese banks concerning the power of a largely unregulated yet hugely popular sector. Perhaps Ding was chosen as a suitable fall guy and example.

Others note that it is just the most recent convulsion to emanate from China’s growing shadow banking economy and it is unlikely to become the last. The growth of peer-to-peer lending, trust companies, securities firms, and credit guarantors in China is poorly understood. Its inevitable growing pains increase the nervousness engendered by Chinese markets, which have been the main reason for the volatile markets all over the world in the past couple of months.

As the Chinese economy shifts from a state-led industrial system to some more consumption-led market economy, we can expect more nasty surprises such as the one sprung by the Ezubao collapse.

And their destabilizing ripples won’t you need to be gone through by those poor farmers who believed China’s own financial Wizard of Oz.